A possible own goal

April 21st, 2010 at 8:02 am by David Farrar

The Herald reports:

’s new Talk plan for pre-pay customers has raised a red flag for the on whether should be regulated.

In February, the commission recommended Communications Minister Steven Joyce accept Vodafone and Telecom’s proposal as an alternative to regulation on the basis the final undertakings would address its competition concerns. The proposal is to reduce rates to 6c per minute by 2014.

But Vodafone’s new Talk pre-pay plan, launched last week, has raised questions whether an industry solution will hinder smaller companies.

The Talk plan offers customers 200 minutes on its network and to landlines for $12 a month on certain pre-pay plans. This works out to about 6c a minute.

It costs 89c per minute to call a Telecom phone from a Vodafone phone. The current termination rate between the networks is 14.4c.

2degrees chief commercial officer Bill McCabe said Vodafone’s new plan made it 15 times more expensive for a Vodafone customer to call a 2degrees phone than to call its own network.

Telecommunications commissioner Ross Patterson said it was the commission’s initial view that the Vodafone Talk plan may be material and have the potential to affect the basis for its recommendations in the final report.

Joyce said: “I wrote to the commission to ask them their view on whether Vodafone’s new Talk Add-on offer to its prepay customers is material to the decision on mobile termination access services. They replied that it may be the case.”

Vodafone’s move may be one of the more stupid commercial decisions in recent times. The Government is days or weeks away from making a decision on mobile termination rates. The Commerce Commission was split 2 to 1 on its recommendation not to regulate, so it is a close call.

And then Vodafone comes out with a plan which absolutely undermines their commercial offer on termination rates. They set a retail price for on-network calls which is half the current wholesale termination rate between networks and will be higher or equal to the termination rate even in 2014, under the commercial undertakings.

If you asked me to sit in a room and think up a stunt that is most likely to push the Commerce Commission and Government away from accepting the commercial undertakings, and towards regulation – this is what I would come up with.

The fact the Minister has written to the Commission and said “Does this changes things” and that the Telco Commissioner has already said “Yes” is significant – especially that the Commissioner was one of those who voted not to regulate.

If the Government does now decide to regulate, they only have themselves to blame. I’m amazed they didn’t hold off any pricing changes until after the Minister made a decision.

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27 Responses to “A possible own goal”

  1. MikeNZ (3,234 comments) says:

    David
    If we are to encourage the sector and make a market or service most available to all new zealanders, why aren’t the connec tion and termination fees between all networks the same.
    Similarly why aren’t they set by the regulator as it is clear that commercial companies don’t do this at all well, if at all, a 12 yr old could have told them that for a lot less money.
    Duh!

    Just goes to show that you don’t need to be educated to use common sense.
    Lawyers and billing, bunch of twats.

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  2. wreck1080 (3,522 comments) says:

    Yes, I mentioned earlier how astounded vodafone released this.

    Vodafone are using high interconnect rates to drive 2-degrees out of business.

    This is a shocking abuse of market position.

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  3. MikeNZ (3,234 comments) says:

    Yes Wreck
    and they complained about Telecom when they entered.
    bloody hypocrites.
    Of course they are doing this to give us the very best service and cheapest rates so that we call more to all networks and landlines aren’t they?

    Can they explain why they amongst others have called for Telecom to be unbundled?
    They, the companies are the problem and reason why we pay such high rates and Joyce knows this.
    This is infrastructure for fucks sake, we are a small market prone to collusion and protectionism.

    National need to step in and make the environment the very best for the consumers not the companies.
    This is money for jam for the companies.

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  4. wreck1080 (3,522 comments) says:

    @MikeNZ – I’m not sure, but I think the interconnection rates are the same between all carriers.

    What you have to look at, is the ability of a new entrant to the market to compete in a high interconnection rate environment.

    What the mobile carriers have, is an implicit agreement between each other to artificially keep the price of inter-carrier calls high.

    When you are a new entrant, you don’t have a lot of customers so it is likely they will be making calls to other carriers rather than within their own. This means, call costs for new entrant customers are higher than the encumbents.

    Very difficult to compete, especially when Vodafone brings out a package like they have.

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  5. Nigel (503 comments) says:

    I’d call it perfect timing, Vodafone have shown their true colours. We should regulate termination charges because the telco’s will never do it fairly on their own.

    The other area I think they have been quite bizarre is not progressively increasing allocated minutes per month ( on a annual basis ) and allowing banking of minutes, but at least with decent termination rates competition will be possible.

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  6. TomYum (26 comments) says:

    Well I’m swapping from Vodafone prepay to 2 Degrees today, this latest piece of gouging arrogance is the deciding factor.

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  7. ben (2,386 comments) says:

    David, isn’t regulation of termination predicated on the idea that somebody other than the caller pays the bill?

    That is not the situation here.

    So why is the government concerned when Vodafone levies different charges to the person making the call? Isn’t the person choosing the plan perfectly capable of deciding what off-net charges they are willing to tolerate when they select their plan? Why should Vodafone not be free to set whatever charges it likes? It still has to convince people to sign up. Or is telecommunications far to important to leave to anybody but the Minister of Telecommunications? FFS.

    If the government is going to tell Vodafone what it can charge callers re: on- or off-net, where does it end? Mobile is a reasonably competitive market – if government is going to set prices here then it can do so anywhere.

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  8. expat (4,048 comments) says:

    What an astonishing act of marketing idiocy.

    How can this not be interpreted as anti-competitive and indicative of the arrogant disdain with which VF holds the Govt & the Regulator. Doesn’t say much for how VF views their customers either.

    We can trust the incumbent duopoly, there is no need for regulation of MTR’s – Yeah Right.

    Mr Joyce, you’ve given them a chance, they’ve not played the game, do you trust them?

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  9. ben (2,386 comments) says:

    Anti-competitive? Jesus.

    You realise, expat, that this is one plan of many offered by Vodafone, and precisely nobody has to take it? It is a great plan for somebody whose contacts are only on Vodafone.

    What exactly is the Minister, Commerce Commission, Farrar, everybody else it seems, trying to save the consumer from here?

    [DPF: It is simple. When you have a retail fee set lower than a wholesale fee, it fucks over the competition. And once the competition is killed off, then prices increase.]

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  10. aardvark (417 comments) says:

    DPF said It is simple. When you have a retail fee set lower than a wholesale fee, it fucks over the competition. And once the competition is killed off, then prices increase

    So what’s to stop Telecom or 2Degrees offering the same deal for their own intra-network calling?

    IMHO this is a good move on the part of VF and all the others have to do to counter it is to offer a matching deal for their customers.

    For a long, long time there has been a price differential between intra and inter network calling on Pre-Pay plans. This is simply making that difference greater.

    Good on VF for offering the cheapest pre-paid calling rates in NZ.

    IMHO.

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  11. expat (4,048 comments) says:

    Where to start?

    Anti-competitive. http://en.wikipedia.org/wiki/Anti-competitive_practices

    It is a great plan, for VF to try and stop newcomers gaining market share by pricing at below interconnect rates.

    The Regulator is trying to save the consumer from being gouged by the incumbents, who are attempting to retain an uncompetitive market place.

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  12. ben (2,386 comments) says:

    David

    [DPF: It is simple. When you have a retail fee set lower than a wholesale fee, it fucks over the competition. And once the competition is killed off, then prices increase.]

    Ok, so this is a predatory pricing story. Firstly, nobody, or almost nobody, in the economics believes predatory pricing matters. It is very hard to find genuine instances of it ever succeeding. The main beneficiaries of any attempts are consumers. And even if you force a competitor out, you still have the problem of others coming in once your prices go back up.

    Secondly, one calling plan by one competitor isn’t sinking anybody.

    I have an alternative explanation. This is a two sided market, and in competitive two sided markets, there is literally no relationship between marginal cost and price. What matters is relative price sensitivity on each side of the market. That is why women are given subsidies (free drinks) to go into pubs on date nights, why customers pay no transaction fees for using their credit card, and why newspapers are sold for less than the price of the newsprint. Consumers are the winners in these markets when prices are left free to fit demand. And so it is for mobile phones. What Vodafone is offering here is a fantastic deal for anyone on a limited budget and who happens to only want to call other Vodafone customers. Honestly, folks, what is the problem here?

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  13. Robinson 666 (115 comments) says:

    Can’t wait for telecom to offer this to their customers as well! Go vodafone!

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  14. Robinson 666 (115 comments) says:

    [DPF: It is simple. When you have a retail fee set lower than a wholesale fee, it fucks over the competition. And once the competition is killed off, then prices increase.]

    Low anti-competitive deals -favoring the customer, are you calling out for the regulatory hand of government?

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  15. aardvark (417 comments) says:

    But David, how is this anti-competitive?

    Vodafone have simply set a new low in intra-network call pricing.

    Telecom could match (or better it) for their own intra-network call pricing

    2Degrees could also match (or better it) for their own intra-network call pricing.

    It’s called COMPETITION and it is bringing down prices!

    Inter-network calls will always be more expensive – that’s because companies only have full control of the costs for those calls taht remain in their own network.

    Even if the retail price is set less than the interconnect rate, it doesn’t matter because these are intra-network calls.

    And besides, do you bitch and moan when the supermarket puts 2.5ltr bottles on coke at a lower price than it costs them to buy it?

    Of course not.

    It’s called a “loss-leader” and is a standard (and widely accepted) part of the retail business.

    Given that voice is only a *PART* of the mobile services provided by VF, I would consider that at the very worst, this is a similar loss-leader strategy to attract customers who will then (supposedly) make them a profit by using SMS or 3G services.

    And if you call *this* anti-competitive, how come you weren’t bitching when Telecom offered its unlimited texting plan way back when it was truly unlimited?

    Come on — I’m no Vodafone fan but I find it hard to understand why people (especially those on the right of the political spectrum) are criticising the effects of competition as it brings down prices in the mobile market!

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  16. wreck1080 (3,522 comments) says:

    Aardvark: The plan itself is not anti-competitive. It is the high interconnection rates that are uncompetitive, and that is highlighted by vodafones new plan.

    This is not a loss leader for Vodafone, they will make money from this since the vodafone customers subscribing to the plan will only incur interconnect fees when calling telecom mobiles.

    The interconnect fee is purposefully constructed to deter new entrants.

    Tell me the difference between price fixing and extortionate interconnect fees? There is little difference, the interconnect fees are a form of price fixing.

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  17. expat (4,048 comments) says:

    This is primarily about material negative impact on competition in a market place that has low competition. The same market place that poo-poo’s the need for regulation to create more competition.

    A firm with dominant market share creates an intra-opco and domestic landline plan that undercuts the wholesale interconnect rates thereby stifling (aka fucking over) new entrants is engaging in pricing practises (probably limit pricing http://en.wikipedia.org/wiki/Limit_price but I am open to other suggestions) that will reduce competition. This is anti-competitive behaviour.

    Bet you a steak dinner TC won’t jump into this one.

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  18. ben (2,386 comments) says:

    Wreck: Joyce’s concern here is with retail prices, not with interconnection.

    Expat: this is one plan by Vodafone. Unless Vodafone is planning to charge low rates across the board, what is the problem? Nobody is going out of business because of one plan. Yes, low prices stifle other players. That is what competition is. Consumers win in that process.

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  19. expat (4,048 comments) says:

    Consumers do not win when competition is crushed, prices just go back up.

    BTW: You just keep telling the Minister what he should be concerned with, that’ll work.

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  20. aardvark (417 comments) says:

    Expat said: “Consumers do not win when competition is crushed, prices just go back up”

    But nobody has explained now this is “crushing” the competition.

    There’s nothing to stop Telecom or 2Degrees offering their own uber-cheap intra-networking voice calls.

    If they choose not to and, as a result, lose business then that’s their call.

    Nobody in an industry can complain simply because they’re not prepared to match a competitors offer in the marketplace.

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  21. expat (4,048 comments) says:

    I and others have explained earlier.

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  22. phunk (2 comments) says:

    You put your prices up you are being Anti-competitive!!!
    You put your prices down you are being Anti-competitive!!!
    If only those complaining had a basic grasp of actual economics….

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  23. expat (4,048 comments) says:

    phunk, you phool.

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  24. BlueDevil (92 comments) says:

    As I understand it, interconnect fees are charged by the receiving network. This means if Vodafone receives 1 billion minutes from Telecom but Telecom receives 1 billion and one minutes from Vodafone, then Telecom charges Vodafone 14.4 cents.
    If the net flow of calls in and out of each network are pretty well balanced, the net amount of money they are arguing over must be pretty small.
    I would have thought that the way to maximise your return would be to lower the cost of connecting to other networks. You may not make much on each call but you would gain more customers and as your percent of the market increases the number of calls terminating on your network would increase.
    What have I missed?

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  25. Anthony (736 comments) says:

    Ben, there was a case in Slovenia where the third operator was driven out of business by such pricing. Even in NZ we have had cases like the Wool Bock vs Pink Batts where competitors have been driven out of business or very close to it.

    And people aren’t wanting to control retail prices – at least get your facts right before spouting off. The retail prices are merely a symptom of problems in the wholesale market.

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  26. Anthony (736 comments) says:

    Blue Devil, if most of your friends are on a competing network and don’t want to call you because it costs them 89 cents a minute then it pretty much doesn’t matter what offer your network gives you to call them – they will be reluctant to call you back.

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  27. sbiddle (4 comments) says:

    I assume you guys criticising this plan realise Vodafone have been offering a 200 minute on-net only You Choose addon for $11.95 per month since they launched You Choose (which was around 2005 from memory). I’ve personally had this plan since then.

    If this new plan is “anti competitive” and breaking any rules why has nothing been done in the last ~5 years to force Vodafone to stop selling their other plan? Or did people just open their mouths without actually checking what was already in place?

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